A global sell-off in government bonds intensified on Thursday as the yield on 10-year U.S. Treasury notes reached its highest level since 2002.
Yields around the world climbed to new highs while oil prices rose, even as more oil is flowing from the Middle East than at any point since the start of the war with Iran. The price of Brent crude, the international benchmark, rose above $100 a barrel. The yield on 10-year U.S. Treasury notes reached as high as 5.34 percent, while the yield on 10-year French bonds approached 5 percent, which was also the highest since 2002. Bond yields and prices have an inverse relationship.
The slumping price of bonds in recent months has sent governments’ borrowing costs soaring. Among the causes are investor concerns about the impact of the war with Iran, high inflation and heavy public debt loads. Another reason, analysts say, is the anticipation of higher central bank interest rates, especially as the economy has remained surprisingly resilient even in the face of an energy shock.
Markets are “very nervous” following long-running concerns about public debt, said Mahmood Pradhan, a nonresident fellow at Bruegel, a Brussels-based think tank, and former deputy director of the European department at the International Monetary Fund.
“The Middle East war has really turned everything around,” he said, adding that central banks are back to raising interest rates and governments have limited fiscal space to respond to more or worsening economic conditions.
Though bond prices fluctuated on Thursday, the trends pushing up yields are unlikely to dissipate soon, analysts warn. On the one hand, the boom in artificial intelligence-related investment in the United States is both supporting economic growth and increasing the supply of bonds in the market.
At the same time, the war in the Middle East is pushing up energy prices and accelerating inflation. Central bankers are increasingly alert to the threat that inflation could stay above their targets for too long. Last month, the Federal Reserve, European Central Bank and Bank of Japan increased rates and traders expect them to do so again this year. The Bank of England signaled it could raise interest rates, too.
These higher borrowing costs are colliding with high government debt levels and creating difficult budget choices because of punishing debt interest payments. In Europe, attention has turned to France, which is trying to pass a budget that will slightly reduce its deficit. But the country has repeatedly struggled to do so, and an upcoming presidential election has made many investors skeptical of France’s ability to improve its fiscal situation in the short term.
While yields are rising across Europe, French bonds are also underperforming. The spread between the yield on French 10-year bonds and German bonds, which are Europe’s benchmark safe asset, widened to nearly 1.3 percentage points, the most since 2012.
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